The cost of funding is negatively impacting loan liquidity in Asia more than the need for banks to bolster capital in anticipation of Basel III. Nevertheless, liquidity remains intact in pockets of Asia, according to Boey Yin Chong, managing director of syndicated finance at DBS.
This year, European banks have continued to retreat from Asia, or if the banks themselves did not retreat then liquidity did, particularly on the US dollar side, he said. This has had repercussions in terms of cost of funding, even though Asian banks have stepped in to a certain extent.
“Today you still have Asian banks that are very strong, you have the Singaporean banks, the Malaysian banks, the large Taiwanese banks and to some degree the Indonesian banks are starting to come in a bit more,” he said, speaking at the Euromoney Conferences Global Borrowers Asia Investors Forum 2012, in Hong Kong on October 16.
“In some areas in Asia the liquidity is still intact. But the pricing mismatch, at least from a loan perspective, why is there still a skew?”
For example, a borrower in Hong Kong dollars will likely be able constrained to receiving a three year loan at 300 basis points (bp), but in the Philippines, in US dollars, a corporate can still borrow at 300bp for five years.
“So when you think about it, how does this happen? What is driving the behaviour? Typically a few things, one obviously is that the capital and the cost of funds equals the returns they get on the asset,” he said.
“Increasingly capital is an issue under the new Basel III regulations, but secondly in pockets of liquidity and pockets of the region, the cost of funding is an even bigger issue than the capital issue.”
In addition to this, over the past three months, the economic slowdown in Asia has brought the danger of non-performing loans (NPLs) to the fore.
“In short it is my view that the European banks to some degree face all three issues: increased capital costs from Basel III, increased costs of funding and access to liquidity [as well as] a slowdown in the economy leading to rising NPLs.”
Asian and Australian banks, however, are at an advantage in that their capitalisation is (on the whole) adequate and there is much less arbitrage on the asset and liability side, or on non-dollar funding.
“To a certain extent we are pretty OK. So overall the prognosis for me is that the Asian banking liquidity is still intact. There are signs that the market is still quite stable and secondly, you don’t have multi-currency borrowings in the same facility. There’s still a fair amount of liquidity out there whether on the loan or bond side [it’s just that] region to region the pricing may not be the same,” he said.
In terms of the particulars, he suggested that while the liquidity premium has dropped significantly over the past couple of months, it may well start to climb again in November and December.
“You don’t know where it’s going or when the market will think something bad is going to happen. If you’ve got something to gain quickly now’s the time to do it before the year end closes in,” he said.